Portability Does Not Replace the Credit Shelter Trust

TRA 2010 included a new provision that allowed for the surviving spouse to use the Deceased Spousal Unused Applicable Exclusion Amount (DSUEA). There are a few reasons why the DSUEA should not be relied upon as a replacement for the credit shelter trust.

First, (I will not “bury the lead” reason), TRA 2010 sunsets at the end of this year. The DSUEA is part of TRA 2010 and, if TRA 2010 sunsets, the DSUEA sunsets with it. Unless your client and your client’s spouse both plan on dying this year, there is no guarantee the DSUEA will exist after the ball drops in Times Square this New Year’s Eve.

Second, to use the DSUEA, an estate tax return must be filed for the first spouse to die. When the first spouse dies, they do not need to file an estate tax return if they have under the applicable exclusion amount. However, in order for the surviving spouse to utilize the DSUEA, the first spouse’s estate must file an estate tax return which would otherwise be unnecessary.

Third, the DSUEA does not apply for GST purposes. The Generation Skipping Transfer tax exemption is a way to shelter a descendant’s inheritance from estate tax in their own estate. Example: John leaves $1 million to his daughter Betty in trust. Betty dies with the applicable exclusion amount. Since John left the money to Betty in trust, with distributions subject to an ascertainable standard, the $1 million is not included in Betty’s estate even though she was the trustee. Thus, the $1 million passes on to Betty’s son Louis without further transfer tax. Even if the DSUEA applies to preserve the predeceasing spouse’s applicable exclusion, it does not preserve their GST exemption.

Fourth, the DSUEA does not operate to protect the assets from the surviving spouse’s creditors. A trust can be drafted in such a way as to protect the assets from the spouse’s creditors, whereas leaving the assets directly to the spouse does not.

In conclusion, while the DSUEA is a useful tool to utilize in the case of an unplanned estate, it is not a replacement for a credit shelter trust.

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